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Commons passes private member’s bill giving parents education tax break

The move could cost up to $1-billion annually

Legislation has quietly passed through the Commons that could give parents substantial tax breaks for saving education money and cost the federal treasury almost $1 billion annually. The private member’s bill, if passed in the Senate, would allow parents to contribute up to $5,000 annually to a Registered Education Savings Plan for each child – and deduct the amount from their income taxes.

It could also bring federal coffers closer to a potential deficit than Finance Minister Jim Flaherty had projected in his budget of just over one week ago.

That prospect has the Conservatives fiercely lobbying senators, hoping to convince them to reject the proposed law.

First introduced by maverick Liberal MP Dan McTeague almost two years ago, the bill essentially treats RESPs like Registered Retirement Savings Plans.

“It’s the same rules that apply that are identical to RRSPs,” McTeague said in an interview Thursday.

“When the contribution is removed down the road, yes it is taxed, but at a level that a student pays,” he explained.

“I don’t know of many students who are making, you know, $100,000 a year, so the tax would be negligible.”

Should the money be withdrawn for any reason other than education, or by the person who made the contribution in the first place, much higher tax penalties would apply.

Under current RESP rules, Canadians can contribute after-tax money to RESPs and anything earned inside the accounts grows tax free. The federal government also matches 20 per cent of contributions, up to $7,500.

There is also a $50,000 lifetime contribution limit, which McTeague’s bill would maintain.

While the Conservatives voted en masse against the bill, it was supported by all three opposition parties, along with independent MPs, and passed easily late Wednesday by a margin of 156-122.

In March of last year, when the bill was first debated at a Commons committee, Finance Department officials estimated it could cost the treasury between $600 million and $700 million a year in lost tax revenue, depending on how many Canadians contributed to RESPs, and how much.

More recently, however, the department has projected a higher uptake by parents looking for a tax incentive to aid them in saving for their childrens’ education, and a higher cost estimate of $900 million annually.

That could take a significant chunk of cash away from the government at a time when it’s preparing for a tight economic squeeze.

In his Feb. 26 budget, the federal finance minister projected a surplus for the fiscal year that starts April 1 of just $2.3 billion, a relatively small cushion considering the overall size of the budget – $239.6 billion.

The surplus drops even further for the 2009-10 fiscal year, to an estimated $1.3 billion – its lowest level in a decade – as the government projects lower tax revenues from a slowing economy and even higher spending.

Given the tight fiscal outlook, it would be irresponsible to pass legislation that would have such a significant impact on the government’s books, says Ted Menzies, the parliamentary secretary to the finance minister.

“If we had the room to do it, we would have done it in the budget,” said Menzies.

“We didn’t feel that we had the room to add another $900 million into what is not necessarily agreed upon as being a good way to fund students’ education.”

Private member’s bills rarely become law, but this one is now headed to the Senate, which is dominated by Liberal appointees.

The Tories are appealing to Liberal senators to use “common sense” in reviewing the legislation, says Menzies. However, there is little else they can do to halt it.

Their charm offensive begins with a significant handicap: the same Tories who now want senators to overrule the elected Commons have spent the last two years campaigning against them as unelected, unaccountable, Liberal cronies.

Had the bill called on the government to spend $900 million, it wouldn’t have gotten this far. Private member’s bills cannot include spending measures. But McTeague’s bill calls for a reduction in taxes, not spending.

The current RESP setup costs taxpayers upwards of $750 million annually, with only 30 per cent of students taking advantage of the program. Add a tax incentive, and that amount could go even higher.

The provinces and territories could also lose an estimated $450 million in revenue through the measure, Menzies warns.

“That’s not going to go over well with some of the provinces,” he said.

But the cost is worth it, and will pay the country dividends in the long run through a larger number of young Canadians attaining higher education, and potentially better-paying jobs, McTeague argues.

“It’s a question of priorities,” says McTeague.

“These are clearly investments that Canada cannot afford to escape, given the need for us to compete in a knowledge-based economy.”

McTeague said he expected the bill to become law, with the support of his party and leader.

-with a report from CP

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